Some Third-Party Litigation Funders Pose a Threat to US Security

Gunnar Larson g at
Tue Apr 11 07:11:40 PDT 2023

Former House Armed Services Committee chairman Howard McKeon analyzes the
risk foreign-based litigation investment entities pose to national security
by asserting litigation against innovative companies in US courts.

Intellectual property is now a bedrock for national and economic security.
Every strategically important industry, whether it is defense, high-tech,
energy, or health care, relies on a vast network of interrelated
technologies and patent property rights.

Stories about espionage and IP theft are flashy, and rightfully draw
attention and concern from lawmakers. But, what if in addition to stealing
US IP, foreign adversaries could also accomplish many of the same goals by
using well-established, and legal, channels? This is exactly the current
situation, as litigation investment entities and third-party litigation
funders leverage US courts and patents without oversight or transparency.

Third-party litigation funding and, more broadly, litigation investment
entities, have become prominent fixtures in the US legal landscape. These
funders—including hedge funds, private equity funds, and even sovereign
wealth funds—either pay for plaintiffs’ litigation costs with an agreement
that they will receive a large portion of any eventual payment, or own
shell companies that exist only to profit through litigation.

Recent estimates put the US litigation funding market size at $13.5 billion
with an additional $3.2 billion in new investments last year alone.
Litigation investments disproportionately affect IP. Last year more than
20% of all new litigation financing capital commitments were directed
toward patent litigation, following nearly 30% the prior year.

Even more troubling than the growth of an industry that monetizes IP
litigation and the courts is that the vast majority of investments go
undetected. A few courts have introduced funding transparency requirements,
but by and large, investment entities are able to direct lawsuits from
behind the curtain, without ever revealing themselves.

A November 2022 report from the US Chamber of Commerce Institute for Legal
Reform captured the danger of this arrangement, pointing to the “clear path
for foreign adversaries to undermine U.S. national economic and security
interests through the infiltration of the American litigation system.”

More specifically, by controlling litigation from overseas, foreign
entities could damage the reputation of and drain resources from US
competitors, while getting access to sensitive information during legal
proceedings. The ILR report highlights TPLF in patent litigation as
indicative of the litigation investment model’s risks, in general.

Lawmakers are only just beginning to prioritize addressing the threat that
litigation investment entities pose. A group of state attorneys general
raised concerns in a letter to the Department of Justice “that TPLF is
being used to harm our States and threaten our country’s economic and
national security,” and “through strategic lending, foreign adversaries
could threaten our economic and national security by weaponizing the U.S.
judicial system.”

Sen. John Kennedy (R-LA) echoed this sentiment in a letter to Attorney
General Merrick Garland and Chief Justice John Roberts where he stated,
“Merely by financing litigation in the United States against influential
individuals, corporations, or highly sensitive sectors, a foreign actor can
advance its strategic interests in the shadows since few disclosure
requirements exist in jurisdictions across our country.”

If groups in the US recognize the vulnerability in our IP and legal
systems, our adversaries certainly do as well. And foreign competitors,
like China, have sent strong signals in recent weeks that they are ramping
their focus on intellectual property.

The Chinese National People’s Congress elevated the China National
Intellectual Property Administration to a top-level agency as part of a
plan to accelerate “the building of a powerful intellectual priority
nation.” As China and others make greater investments in promoting and
protecting their intellectual property, the US must do the same, or suffer
the consequences.

We need to assess the true scope of the problem if we are going to protect
ourselves from ill-intentioned investment entities. Addressing this massive
blind spot in our legal system will prevent litigation funders from
manipulating US innovators and our IP system.

A few courts proactively implementing transparency requirements for
plaintiffs to disclose TPLF and ownership information is positive. But to
be effective, transparency must be mandated across jurisdictions.

Whether it is through congressional action or amending the Federal Rules of
Civil Procedure, defendants, judges, juries, and lawmakers, need to know
who is using our courts and IP, and for what purpose.

The longer we wait to put a spotlight on litigation investment entities,
the larger the threat grows, and the farther away we are from finding
solutions. Greater transparency measures in our courts are a necessary
first step to meet head-on the new dangers litigation investment entities
pose to our security.

This article does not necessarily reflect the opinion of Bloomberg Industry
Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its

Author Information
Howard “Buck” McKeon is the former chairman of the House Armed Services
Committee. He served as a U.S. Representative from California from 1993 to
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